Double Taxation Avoidance Agreements

Taxation of productive factors involves balancing national against international considerations. National objectives concern revenue, allocative efficiency and equity effects of taxation. Tax systems have fundamental ramifications also on the volume and allocation of productive resources internationally because factor returns and underlying tax bases straddle national boundaries. To alleviate possible conflicts, adjustments to domestic taxation are needed. One set relating to direct taxation comprises residence and source principles. Another set for indirect or consumption taxes—GST or VAT—comprises origin and destination principles. In the prevailing globalised world, cross-border transactions are increasing and becoming more complex. At the same time, domestic resource mobilisation has gained greater significance as governments feel pressured to generate additional revenues for socio-economic programmes. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as the location of the source of income (source principle), residence of the taxable entity (residence principle) or presence of a permanent establishment (PE) in its territory for carrying out business activities which generate profits. To alleviate double taxation of the same productive activity in different jurisdictions, countries negotiate tax treaties with treaty partners. The concerns of tax treaties comprise this chapter.